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Challenges and Opportunities: The IMF and the CaribbeanAddress by Shigemitsu Sugisaki
Deputy Managing Director of the International Monetary Fund
At the High Level Seminar on the Caribbean
St. Peter, Barbados, February 8, 2000
Mr. Chairman, Ladies and Gentlemen.
It is a great pleasure to join you in this beautiful location today, for what is already turning out to be a fascinating and productive seminar. The Caribbean is a valued branch of the IMF's global family. And I hope and believe that this gathering will give us the opportunity to strengthen our family ties. It is an added pleasure to be here with friends from many other organizations that we are privileged to work with in the region: including our co-sponsors, the Caribbean Development Bank, the World Bank, the Inter-American Development Bank and the Commonwealth Secretariat.
In the economic sphere—just as on the cricket pitch—the new millennium presents the Caribbean with a combination of challenges and opportunities. There may be little the IMF can do to help ensure that recent events in New Zealand are erased from memory when Zimbabwe and Pakistan arrive on tour this spring. But on the economic front, I am convinced that we can make an important contribution to ensuring that the region lives up to its undoubted potential. We are ready and keen to help where we can.
Let me begin today by saying a little about the outlook for the Caribbean economies. I will then address some of the policy challenges that the region must confront to sustain and further improve on this performance. Finally, I want to talk about some of the steps which the Fund has been taking—and will be taking—to strengthen our relationship with our members here in the Caribbean.
2. The Economic Outlook
First, the economy. Caribbean nations have achieved some important economic successes over the last two decades, in often unpromising circumstances. For the most part, the region has enjoyed economic and political stability, its social indicators are good and on average incomes are high relative to other developing countries in the Western Hemisphere. But growth has been relatively modest. And crucially, it has not been strong enough to bring about significant reductions in what remain distressingly high rates of unemployment and poverty. Economic performance cannot be considered fully satisfactory until there is a marked improvement in these indicators.
So what is the starting point? Growth in the CARICOM countries improved significantly in the 1990s compared with the difficult period of the second half of the 1980s. Inflation declined in many of the countries in the region, though it remained in double digits for a few. However, the fiscal deficits, after some improvements in the first half of the 1990s, widened somewhat in the second part of the decade. Although the current account deficit remained significant in most cases because of large capital projects, the overall balance of payments for the region continued to be sustainable mainly because of equally significant inflows of direct investment.
Of course, it is misleading to generalize and these trends mask big differences from country to country. Belize, Trinidad & Tobago and many of the smaller nations in the region have enjoyed quite strong growth. Despite slowing recently, Guyana has fared well since their period of decline in the 1980s. Most disappointingly, Jamaica has suffered a prolonged recession since the mid-1990s. But, hopefully, growth may resume soon. As the IMF's Executive Board noted last month, there has been a welcome convergence of views between the Jamaican authorities and Fund staff about the macroeconomic challenge facing the country.
Returning to the region as a whole, there are good reasons to expect stronger growth over the next five years than has been achieved in the recent past. Let me mention three contributing factors. First, there should be stronger demand from export markets outside the U.S. The world economy is doing a lot better now than anyone dared hope a year ago, when the devaluation of the Brazilian real threatened a further wave of financial crises. Second, the prices of major export commodities are likely to be higher, in part because of robust demand in the industrialized countries. Third, there will be the benefits of new investment in the energy and tourism sectors.
Of course there are many uncertainties too. The most important risk is perhaps a slowdown in the U.S. economy. But we can take heart from the Federal Reserve's decision to raise interest rates last week, which illustrates its determination to keep this remarkable upswing on track without fuelling inflation.
In the CARICOM countries, it seems quite reasonable to expect 3½ per cent growth a year over the next five years on the assumption that countries maintain current policies and that significant external shocks are absent. While this would be a better performance than the average of the last two decades, it is important to put it in perspective. Growth in the region would still be slower than the expansion of the world economy as a whole, which seems set to exceed 4 per cent a year. And it would also remain too weak to make much difference to the region's poverty and unemployment rates.
3. Policy Challenges
This mixed picture makes it more important now than ever for the Caribbean to tackle head-on the policy challenges that confront it. I am well aware of the feelings of some policymakers and commentators in the region that the IMF and other organizations are not sufficiently sensitive to the special problems faced by small economies in general, and those of the Caribbean in particular. We are determined to address these concerns. This seminar is an important step in that process. But I must also tell you frankly that the challenges which the Caribbean faces in the coming years make it all more important for countries in the region to pursue the sort of sound macroeconomic and structural policies which the IMF advocates to its members across the world. Only then can these challenges become opportunities.
Sound policies are especially important in the Caribbean, because economies here are more vulnerable to external shocks than most. Many countries have made progress in diversifying their economies over recent years. But in many cases the structure of exports remains concentrated on a just a few products. Many countries also rely on preferential access to markets for these exports. This is likely to be eroded and eventually lost as trade liberalization continues. The Caribbean is also seeing inflows of external assistance—both grants and concessional lending—decline steadily. In addition, there remains the fact that the region is always vulnerable to natural disasters—be they hurricanes, landslides or volcanic activity. In addition to the tragic loss of life and human suffering, these disasters impose heavy economic costs. They help explain why growth in the Caribbean is so volatile between countries and over time.
In the face of these vulnerabilities, what are the key challenges policymakers face on the threshold of the new millennium? Let me briefly mention three: bolstering domestic financial systems, strengthening fiscal policies and boosting competitiveness.
If we have learned one thing from the turmoil that swept emerging market economies over the last three years, it is the importance of an efficient, well-supervised financial system. This is as true of the Caribbean as anywhere else. There is plenty of scope to improve the efficiency of banking systems in the region and to reduce the cost of financial intermediation. This should stimulate investment and spur economic growth.
One way to bring the performance of the domestic financial system closer to international best practice is to monitor the system and its performance in light of international codes and standards, accelerate the privatization of state-owned financial institutions, and remove barriers to the entry of foreign players. Competition in the banking sector could also be promoted by passing and enforcing stronger anti-trust laws. In some cases bankruptcy laws and accounting standards also need tightening.
Several governments in the region have promoted offshore financial activities as part of their efforts to achieve economic diversification. There is a view in many quarters of the world that such activities are an inherently undesirable because they may serve as a conduit for activities that escape official rules and regulations. While you may have different views on this, as a matter of political practicality it makes it all the more important to ensure that such activities are well supervised and well regulated within a clear legal framework. The CARICOM Bank Supervision Harmonization Project and the Caribbean Financial Action Task Force are making important contributions here. But more can and should be done.
A second challenge is to maintain sound fiscal policies. You would expect a Deputy Managing Director of the IMF to say this, anywhere and anytime. But this advice is particularly pertinent to the Caribbean now, because traditional sources of external earnings are likely to diminish in the near term. Preferential access to EU markets is being eroded. Competition is intensifying in the tourist sector. And offshore financial centers are under pressure because of money laundering concerns. Frequent natural disasters also necessitate the maintenance of an adequate fiscal cushion.
Countries in the region have already begun to modernize tax and customs systems, and to manage public sector spending more effectively. These efforts need to be stepped up. Ineffective tax incentives for investment should be streamlined. Property, the parallel economy and the self-employed could all be taxed more efficiently.
On the spending side, countries should make a greater effort to privatize, close or restructure loss-making public sector enterprises. The loss of preferential access to EU agricultural markets will make this all the more difficult. But if you wish to protect people during a process of painful economic adjustment, it is far better to invest in equipping them to take other skilled jobs than to prop up uneconomic employers.
4. The Role of the Fund
Many countries in the Caribbean are already addressing these challenges with courage and conviction. Reform efforts will only succeed when governments and electorates alike are committed to them and recognize their long-term benefits. Our role at the IMF is to provide support and assistance where we can and where we are wanted, and this is an area which I would like to address now.
As I mentioned earlier, I am well aware that some policymakers and commentators feel that we have not been sensitive to the unique circumstances of the region and the countries within it. Whether these perceptions are true or not, it is our responsibility to take criticism seriously. This means we need to redouble our efforts to ensure that our advice, lending and other activities in the region are relevant and understood by the civil society to be beneficial for the region.
As you are aware, we have already restructured our internal operations so as to improve our regional focus and facilitate closer contact between Fund staff and national policymakers and officials in the Caribbean. This seminar is another important step. By bringing together ministers, central bankers, academics and representatives from the international organizations active in the region, I hope it will be possible to broaden and deepen the consensus on what needs to be done to ensure that the Caribbean exploits its economic potential. The subjects under discussion—fiscal reform, poverty alleviation, financial system soundness, governance and trade—are each vitally important to achieve this objective. I hope that we shall be able to have similar gatherings in the future.
Our deliberations here this week will also help the Fund in our efforts to develop a research agenda that is more relevant to the needs and circumstances of Caribbean nations. We already have work under way on several relevant topics like bank supervision and regulation, fiscal reforms, labor market and competitiveness, interest rate and exchange rate policy, and external debt management and vulnerability.
In our regular surveillance of economic prospects and policies around the world, we are also paying greater attention to their regional dimension—in the Caribbean and elsewhere. This was one of the conclusions which emerged from an external review of the IMF's surveillance work last year and it is an important lesson to have emerged from the Asian financial crisis. To this end, Fund economists are preparing studies on the economic prospects and policy challenges in the region, as well as the operation of the Eastern Caribbean currency union. Both will be made available to the public. Surveillance over the OECS countries will be complemented with regular discussion between Fund staff and the regional institutions (ECCB, OECS) on regional policies and common issues. Reports on these discussions will provide a context for the individual consultations with the countries in the Eastern Caribbean region. Also, for the broader Caribbean, the staff will be intensifying its collaboration with the CDB and CARICOM.
Surveillance is sometimes viewed as an ugly word with rather authoritarian overtones. But it is a valuable process which allows policymakers to draw on the experience of their counterparts across the world, who may have found themselves facing similar situations. By increasing the regional focus of surveillance, I believe it should be possible to make its conclusions more relevant and more useful to policymakers in individual countries.
Another particularly exciting initiative will be the creation of the Caribbean Regional Technical Assistance Center (CARTAC). This will bring together several regional and international institutions to improve the range and quality of technical assistance available to Caribbean nations. It will concentrate on budget management, tax reform, tax and customs administration, bank supervision, and monetary fiscal, balance of payments and national accounts statistics. This collective approach will allow the pooling of resources, permit greater collaboration between institutions and provide for more effective follow-up between the users and providers of assistance. A similar model has already demonstrated its potential in the Pacific, with the creation of the Pacific Financial Technical Assistance Center. I hope that the center can be up and running in the second half of this year.
Mr. Chairman, I hope that these efforts make clear the Fund's determination to improve the service which we offer to our members in the region. Ultimately, the destiny of any nation lies in its own hands. But together with our colleagues in other international institutions, we hope and believe that we can play our part in helping the Caribbean fulfil its economic potential. The prize is a valuable one. And the men and women of this beautiful region will rightly expect us to seize it.
IMF EXTERNAL RELATIONS DEPARTMENT